Why “the economy” isn’t an excuse to fail
2015 proved that even unicorns aren’t invincible. Snapchat’s value took a 25% hit. Evernote went through a second round of layoffs. Optimizely had to let go of 10% of their workforce. (Let’s not even talk of Zenefits.) Good Technology sold for less than half of its top valuation.
And that’s just the tip of the iceberg.
These economic changes have founders afraid. “If it’s happening to billion-dollar businesses, it’ll happen to mine. Right?”
Not necessarily. History is full of hugely successful companies founded and expanded during harsher conditions than these.
With the right approach, you can do more than just survive a down economy. You can thrive in one. Here’s what it takes.
Treat economic downturns as opportunities
You don’t have the luxury of being a victim of the economy.
If your startup is going to survive long-term, you need to learn to grow in good and bad markets.
Instead of seeing a downturn as an end-of-the-world crisis, see it as an opportunity for growth. Here are three major opportunities hidden in every downturn.
1. Higher visibility
When a startup is struggling, one of the first cuts usually made is to marketing.
But what if you became the one business in your market that continued to invest in marketing? When you’re the only one talking, you’re the only one heard.
Further increasing your visibility is the fact that a lot of startups won’t survive the economic shift. As your competitors close their doors, the market becomes less crowded and you become better positioned.
2. Greater access to talent
Down economies are one of the best times to grow your team.
As budget cuts are made and startups shut down, the market will be flooded with skilled developers, marketers, and salespeople.
Because jobs are scarce, you’ll be able to hire talented employees for substantially less money than in a strong economy.
3. More customers on the market
Every competitor that shuts down or scales back creates an opportunity to gain their market share.
Close experienced this firsthand after one of our early competitors canceled their international customer’s contracts. With a single tweet, we were able to generate an additional $585/month in revenue.
By continuing to invest in sales and marketing, you can win customers who used to use your now-defunct competition.
The market will be larger than ever, and the competition fewer. Don’t let crises distract you from that kind of opportunity.
4. Everything becomes more affordable
It’s not just customers and candidates that become more accessible in a downturn.
As this Forbes article points out, nearly every aspect of your business will cost less in a bad economy.
That includes office supplies and furnishings, real estate, and even various subscription-based services.
For an opportunity-focused startup, there’s no better time to invest in future growth than when everyone else is focused on cutting back.
Diversify your customer base
In the early stages of your startup, the primary focus should be identifying and selling to a specific niche. But as your startup grows, start diversifying the markets you sell to.
If you only sell to technology startups and a sudden downturn massively affects the technology market, you risk losing all your customers at once. You can mitigate that risk by selling to different markets.
Once you’ve sold to the major players in your initial niche, look into 5–10 different markets. These new verticals should be separate from your initial customers, but not entirely foreign to you.
Instead of starting from scratch, find natural growth points where your experience in your initial market is relevant and applicable. Expand into markets where you have a competitive advantage, such as inside connections or information.
The more diverse your customer base, the less damage you’ll take during downturns. That being said, don’t go overboard and expand too much, too quickly.
Don’t count on investors
Downturns often affect venture-funded businesses more than bootstrapped startups.
In a strong economy, VC-backed businesses have a seemingly unlimited supply of money. If your startup is venture-funded, you’re going to make dramatic shifts in how you operate.
The biggest change will be how you view and handle money. In a down economy, investors invest less money in fewer ventures. Don’t assume you’ll receive the funding you’re used to.
Instead of operating on debt, center your business practices around your net revenue. In a downturn, you can’t afford to spend more than you earn.
Use down markets as an opportunity to learn to manage and invest your own money, rather than someone else’s.
Embrace massive change
Desperate times call for desperate measures. If you approach budget cuts by saying, “What’s the least amount of change we can make?”, your startup will not survive economic hardships.
Founders who thrive in downturns say, “If we need to change, let’s change as drastically and fundamentally as possible. If we have to make a cut, let’s cut to the bone.”
One of the most common scenarios you’ll face in a down economy is letting people go to cut costs.
If that happens, it’ll be tempting to only make the “easy” cuts, but that’s usually not enough. If you need to cut costs by 50%, it’s going to take more than firing the junior staff.
In this case, drastic change looks like identifying the people you absolutely have to keep, and letting everyone else go.
It’s brutal, but being a founder means making the decisions no one else wants to. When you need to make a change, change as quickly, drastically, and fundamentally as possible.
The difference between downturns and disasters
As Y-Combinator’s Paul Graham said, "The state of the economy doesn't matter much either way. If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders."
Ultimately, the economy is only one of many factors that plays into the success or failure of your startup. You can use it as an excuse to exit, or as an opportunity to take your business to the next level.
The important thing is that you make a decision and commit to it. If you’re going to exit, there’s no shame in that. Find a way to do so gracefully and move on to the next thing.
But if you’re committed to thriving in a down economy, start making the hard decisions proactively. It won’t be easy, but it could be the best thing that’s happened to your startup.
Dealing with economic downturns
This post was inspired by a conversation Hiten Shah and I had on our podcast, The Startup Chat. Check it out here!
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